November 04, 2009

FTC's Pain in the Gas

With prices at the gas pump creeping upwards again, the Federal Trade Commission's new rule cracking down on market manipulation by the petroleum industry comes at an apt time.

The final rule, which goes into effect today, bars "fraudulent or deceptive conduct that could harm wholesale petroleum markets," according to the FTC. Penalties for violating the rule include fines of up to $1 million a day.

The rule will "help us prohibit conduct that harms consumers but that may not violate antitrust laws," said FTC chairman Jon Leibowitz in a statement when the commission voted on the rule in August.

Examples of such conduct include false public announcements of planned pricing or output decisions, false statistical or data reporting, and sales designed to disguise the actual liquidity of a market or the price of a particular product.

But Commissioner William Kovacic voted against the rule, warning in a statement that when implemented, it will “cover a vast number of routine transactions – literally thousands daily – in petroleum products. These transactions are the indispensable means by which gasoline, diesel fuel, and jet fuel move from refineries to end users.”

Kovacic flagged language that makes it illegal to knowingly engage in acts that “would operate as fraud or deceit on any person.” He also objected to the section that makes it illegal to intentionally fail to state a material fact where “such omission distorts or is likely to distort market conditions.”

Kovacic wrote, “Because the final rule’s requirements are unlikely to proscribe only genuinely harmful conduct, there is a serious danger that it will impede routine contracting that is benign or pro-competitive.”

Antitrust partner Gerry Alexis at Perkins Coie in San Francisco, who represents petroleum companies, says that the industry is expecting “fairly aggressive enforcement” from the FTC. Alexis also predicted suits may arise under “little FTC Acts” – state consumer protection laws that authorize private causes of action.